Market Driven Competitive Advantage

Your strategy should be driven by the needs of the market. Becoming market-driven is critical to intentional product success. But it is not enough to understand your market. You have to sustain your understanding, and take advantage of it, competitively.

Markets Evolve Over Time

We all acknowledge that markets are not completely static. If they were, there would be no impetus for innovation. Customers change, their environment changes, and the competitive landscape changes. All of these changes cause a market to change. Even if a given market were static, you don’t have perfect information about it. Your understanding of that market increases over time.

The market is an abstract concept, and you have to make decisions about something tangible. What is tangible is your understanding of the market. And you make decisions based on your understanding of the market. You can visualize the market in a way that may cause you to rethink (or solidify) your approach to solving market problems.

In the chart above, we are showing that there is some amount of information (think of information as an understanding that we haven’t developed yet) about a market. It represents the potential of what could be understood about the market. Over time, the amount that can be understood increases. Also note that there is already a non-zero amount of “understanding” at the start of the chart. The market did not spontaneously spring forth from an oyster the moment you decided to look at it.

You Affect Your Markets

There is also an important dynamic to consider – you affect your markets by introducing solutions.

Whenever someone introduces an innovative solution to a market problem, the market changes. Solving that problem exposes another problem. Or it may introduce another problem.

When cars replaced horses, they introduced atmospheric polution problems. Before that, we only had to worry about horse waste.

When airplanes solved the problem of traveling long distances in a short amount of time, more people began traveling further. And those people discovered a need (desire) to stay connected (phone, internet, etc) while en-route.

When it became convenient to carry music around with you on a portable player, the problem of carrying all of your music around with you was discovered / created.

You can argue that these problems were introduced because of innovative solutions, or that the problems were latent, and were only discovered because of the innovations. It doesn’t matter. What matters is that these problems were previously unaddressable, and now solutions to these problems have value.

Your Knowledge of Your Markets

Using the diagram above as a baseline of what can be known, and overlaying your knowledge looks like the following:

At the moment when you decide to understand a market, you don’t know anything about it. Your knowledge rapidly approaches what “can be known”, and assuming you have perfect research, elicitation, and synthesis skills, you eventually understand all that can be understood about the needs of the market.

Competition in Your Market

In the diagram above, you see the dynamics of your market. You develop an understanding of your market, a competitor delivers an innovative solution to a problem, and you have to play catch-up. Note – this is only talking about playing catch-up in your understanding of the market. You also need to continue to develop new solutions for the market in order to capitalize on your understanding.

The next diagram shows what this will look like when there is active competition in the market.

The diagram above shows three disruptive events. You innovate, someone else innovates, and you innovate again. Each time someone else innovates, they have an edge on understanding the market. They just solved a problem, uncovering new problems that can be solved, and you have to gain that knowledge too – it wasn’t available (or didn’t exist) previously.

Competitive Advantage

Each time you innovate, you establish a temporary competitive advantage.

When you introduce a novel solution to a problem, the market uncovers new problems. Presumably, you have already thought about the next steps. You have already engaged the market (through prototyping and other elicitation activities) to get feedback on your solution. Hopefully, as part of that exercise, you’ve also explored “what’s next” and incorporated that into your plans. This is the advantage you have created. If you don’t explore “what’s next,” you waste that opportunity.

The opportunity won’t last forever. Your competition will see your solution, talk to your customers, and otherwise explore “what’s next.” It will take time, but they will catch up. Over the long term, you benefit from exploiting a series of these opportunities. Look at the iPod and the Zune. Apple has delivered a series of disruptive changes, continually building on what they have learned. Microsoft is playing catch-up with the Zune. Each version of the Zune shares a lot of design cues and features with earlier iPods. To Microsoft’s credit, they are trying to innovate too – like with the “squirt” technology that lets you share a song temporarily with another Zune user. Either this is not a valuable problem, or the solution is not effective – because it has not taken off (in buzz, market share, or general clamoring for an iPod-based equivalent).

Fast Follower Competition

A fast-follower reduces (but does not eliminate) your temporary advantage. At the same time, the fast follower creates their own advantage relative to every other competitor in the market. This can be a very effective strategy, especially when there are multiple innovators in a single market. The fast follower can follow the best ideas of each innovator, possibly even ending up with a better overall product than any of the innovators (who are slow followers of other companies).

Microsoft is clearly a follower of Mozilla when it comes to browsers. The tabbed navigation concept introduced in Firefox was a game changer, at least for the tech-savvy who need to juggle multiple web pages at the same time. Personally, I was thrilled to move from multiple Internet Explorer windows to a single Firefox window with multiple tabs. IE7 has that capability now too. I don’t know the browser market well enough to know if I would characterize Microsoft as a fast follower, but my guess is no.

After the post-World War 2 reconstruction in Japan, the Japanese automakers definitely acted as fast followers. They did it with assistance from the US, and even moved past the US automakers by choosing to listen to Deming (a guru on efficiency and quality) instead of ignoring him like the US big 3 (automakers) did. And it did indeed pay off for them – Toyota is poised to unseat GM as the number one automaker in the US for 2008. There are certainly other factors at play, but the Japanese companies would never have had a chance if they had not been competitive in the first place.

Business Agility

Business agility is one of the hotter buzz-phrases these days. The business-rules-automation market is thriving on the desire of businesses to become more agile. Why does agility matter? Because it can make you dramatically more competitive.

Business Agility is not the same as agile development!

Business Agility is a measure of the ability of a business to adapt to the changing needs of the market. To adapt quickly, your company has to accomplish two things:

Quickly identify and understand the changes in your market.

Quickly deliver new and improved solutions that address the changing needs of your markets.

In the diagram above, you (the red curve on the top) are innovating repeatedly. You are also adapting to the changes in your market from other innovations (and other sources of change, not shown). You are practicing agile product management. Your competition (the green curve on the bottom) is not. As this trend continues, you see that your exploitable advantage becomes a sustained advantage. You will have an ever-increasing advantage as you stay tapped into your market. If you are executing (to deliver product) and communicating (to educate), you will be able to leverage your insights into a position of thought leadership. [Note: “thought leader” is a title that can not be self-annointed, it has to be earned and perceived within your market / community.]

The end result is that you will be consistently aware of unserved market needs that you can serve before your competitors can. That translates into increased demand for your products, which you can use to grow share, grow profits, etc.

That’s why business agility matters. It isn’t cost reduction that is important, its top-line growth.

Agile Product Management

Staying tapped into your market like this is a strategic component of agile product management. While continuously staying tapped-in (or Tuned-In), you regularly interact with your internal stakeholders to make agile development processes work. Enthiosys has a great introduction to agile product management (free download with registration), if you’re getting frustrated with the many “empty presentations” about agile product management, then definitely check that one out – it has meat. Relative to their onion, the topics in this article map to the portfolio and product layers.

If you aren’t already convinced of the value of a tight market focus, consider the following diagram, contrasting the impact of agile product management and traditional, waterfall product management.

The red curve on the top (same as previous slides) represents an agile product manager staying tapped into her market.

The grey curve in the middle represents a product manager staying tapped into the market, but not as tightly.

The green curve on the bottom shows what happens when your organization is trapped in a waterfall delivery model.

The green curve, instead of reflecting understanding, reflects the understanding against which the team executes. When you lock in or “freeze” the requirements, then begin a sequential development process, you stop taking advantage of market insights. You essentially decouple your implementation team from the market – “we know enough already.” So even though your product manager may be learning more (the grey curve), you aren’t taking advantage of that knowledge, so it is adds no value.

As an agile product manager, working with an agile implementation team, you will run circles around your waterfall competition. Not only will you establish thought leadership, but you will be creating a distinctive competence for your company. Your ability to understand the market, and quickly respond to changes in the market with valuable solutions will differentiate your company.

You also effectively change the dynamics of your sales over time. Your accelerated insights allow you to release products (or capabilities) earlier. Here’s a diagram from an earlier article on the ROI of agile that highlights the impact of this:

If we take the most conservative approach to modeling sales with an agile process, the graph would look like the following:

The sales volume curve is shifted to the left without changing its shape. The exact same growth curve applies to the product (this is the conservative assumption). The decline in sales continues to decline. The difference is that our previous time horizon (which remains fixed) now includes additional sales.

Agile Without Product Management

There are people who suggest that product management has no place in an agile environment. Those people believe that markets can’t be understood until they are served. They will argue that customers “don’t know what they want” based upon the feedback they get from prototypes. Customers change their minds. Yup. But it isn’t that the customers don’t know what they want, nor is it that markets don’t have shared needs/problems/goals/requirements – they do. Providing solutions to those problems drives next-level thinking, and the identification of new and different problems.

If you don’t have product management, you can only succeed through luck. Throw stuff against the wall and see what sticks. If something sticks, you win. This is better than a waterfall model that ignores the market (for long periods of time where release plans are “set in stone”). But it falls well short of driving a very efficient, adaptable implementation team directly towards identifiable market needs.

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15 thoughts on “Market Driven Competitive Advantage”

Great post. One other thing to add, taking on too much funding can really prevent one from learning about their market. Investors care about different things than customers. Time dedicated to investors is time not dedicated to customers or learning about the market or even the people you work with.

Scott – great thought provoking post that I hope many senior product management types will read, re-read and recognize that competitive advantage is as dynamic in today’s market as it will ever be, and you have to acquire the methods or have the DNA to be vigilant in its pursuit.

The product management community would be grateful if you’d extend this article at the end of 2010 and share any information on the impact of social media and the market-driven competitive advantage.

I’ll definitely write more about this, and hope to get insights about how to better leverage conversations with your customers (social media and otherwise) to gain market insights that lead to competitive advantage.

Scott – thanks for follow on comments. Scott Gilbert and I have done some research on Social Media’s impact on Market Research. We’d be happy to share this with you. Scott used the content for the SV Product Camp and its’ posted.

Thanks, Jim! Send me the link/content, I’ll definitely review. Also – you should totally get a gravatar, so that your smiling face will show up here – you contribute to the conversations a lot, so people should know who you are :).

Great post. Nice to draw the relationship between deep understanding and continuous evolution. I think most people like to think it’s one or the other (I need a subject matter expert and I’m good to go).

I think the only other thing I’d add to the conversation is to note that not all markets move at the same rate.

I was listening to a conversation (Reporter’s Round-Table) where Don Dodge (former Microsoft guy) mentioned that he commented several years ago that Microsoft was (then) where IBM had been in the early 1980s.

In contrast, I look at the smartphone market – a year ago, Android was a “blip” in market share, and now has about 1/3 of the installed base in the US according to a couple research reports I found last week.

You also touched on the classic “should I hire a domain expert?” question – which is almost a third-rail in product management these days. Personally, I think you hire someone who you expect to be an expert for the foreseeable future – and that does not require that someone have the expertise beforehand, just that they can quickly gain and sustain it.

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